Taking Linux to the Bank

Contrary to popular perception, many open source vendors are making money, even growing in size, revenue, installed base, and influence. Their secret? The dual license, a business model that allows software makers to provide commercial software licenses for a fee, while simultaneously providing free software to a broader community. Industry analyst and longtime Linux watcher Stacey Quandt explains how it works.

Open source vendors are often asked how they make money if their software is free. Well, believe it or not, open source and profit are not oxymorons. In fact, several open source vendors are making money, growing in size, revenue, installed base, and influence.

While products, business models, and licenses differ, companies such as MySQL AB (creators of the MySQL database), Sleepycat Software (creators of Berkeley DB and Berkeley DB XML), and Trolltech (proprietors of Qt and Qtopia) are proving that you can take open source to the bank. Cha-ching!

Contrary to popular perception, open source software companies are making money. While consulting fees and software subscriptions provide the lion’s share of revenue for most open source vendors, another (not necessarily mutually exclusive) business model, the dual license, is garnering profits, too. A dual license allows software makers to provide commercial software licenses for a fee, while simultaneously providing free software to a broader community.

To be sure, the dual license isn’t unique to open source, nor is it all that new. (Ghostscript, an interpreter for PostScript and PDF, has long been available under the Aladdin Free Public License, the GNU General Public License (GPL), and as commercial software licensed by Artifex.) However, the dual license is the primary engine of growth for MySQL AB (http://www.mysql.com), Sleepycat Software (http://www.sleepycat.com), and Trolltech AS (http://www.trolltech.com). Offering a dual license allows these companies to serve many disparate audiences, yet offer a large suite of attractive features at no or little cost.

Disruptive Technology and Business Models

Dual licensing is a small, but important driver of disruptive technology, because it allows vendors to offer a low-cost, commercial alternative to an otherwise open source software solution. While the the GNU Public License (GPL) provides freedom to use, copy and redistribute, it also mandates that enhancements be provided under the same terms. However, a commercial license eases those restrictions, permitting the software to be integrated and even redistributed within a proprietary solution.

Essentially, dual licensing gives software vendors the ability to foster market segmentation between open source licensed products and commercially-licensed open source products. This distinction is non-trivial. MySQL, Trolltech, and Sleepycat make most of their revenue from selling commercial software licenses to enterprise and corporate customers. Indeed, Sleepycat, Trolltech, and MySQL jointly announced that 2003 software license revenues increased an average of 65 percent over the previous year, largely due to those companies’ dual license business model.

Moreover, a dual license model can deliver higher margins than an open source subscription model. For instance, Red Hat sells subscriptions to Red Hat Enterprise Linux and Red Hat Network. However, competition with SuSE, Miracle Linux, and Red Flag, and Red Hat’s high list price for its premium offerings (which, in a number of cases, is significantly discounted), limits Red Hat’s ability to attain volume sales and market saturation.

And the traditional approach of open source — pure open source vendors making money by selling services and support — is only sustainable if the solution is an open source market leader and can apply pressure on proprietary products. Dual licensing is an alternative, yet effective technique to steal market share from proprietary software vendor solutions.

Maintaining Standards and Preventing Incompatibilities

There are other advantages to the dual license. In some cases, a dual license saves time and effort — two other valuable forms of currency.

For example, OpenOffice.org uses a dual license — the Lesser GNU Public License (LGPL) and the Sun Industry Standards and Source License (SISSL) — to manage source code contributions. Under SISSL, users agree to publish any changes that deviate from the standard protocol and to either provide the modifications in source form or as a reference implementation of the modifications. The restrictive nature of SISSL means users who modify OpenOffice.org must make changes available to all third parties under the same terms and on a royalty-free basis within thirty days of their first customer shipment.

OpenOffice.org’s use of a dual license protects the integrity of the project by reducing potential for fragmentation. Dual licensing of the OpenOffice.org source code also grants access to the technology to both members of the community who prefer the GPL and to developers or companies that cannot adhere to the GPL.

MySQL’s Dual Licensing Evolution

MySQL AB draws more revenue from commercial license sales of its relational database than from any other source. However, it wasn’t always this way.

Development of MySQL started in 1995, and at first, MySQL used a license that permitted limited, free distribution and usage married with a requirement that end-users share modifications of the source code if deployed on Unix and Linux systems. At the same time, the license for the Windows version of MySQL was far more restrictive.

However, the widespread adoption of Linux in Internet server infrastructure motivated MySQL to modify its dual licensing strategy. The company selected the GPL for all operating system platforms, while LGPL covered its libraries. This change addressed concerns about linking libraries with GPL software and the potential contamination of closed-source solutions. But it also had the adverse affects of limiting the number of commercial licenses MySQL could sell and expanding the inappropriate distribution and use of MySQL.

Although customers claimed LGPL was an acceptable interface, MySQL leveraged its copyright on all of its own source code and chose to discontinue use of the LGPL for libraries. This increased MySQL revenue, but altering the license created problems for Linux distribution providers that bundle MySQL with the PHP scripting language. Red Hat, for example, didn’t have time to include an updated version of MySQL and failed to ship MySQL with Red Hat Linux Enterprise Linux 3.0.

Later, MySQL addressed this issue with the Free and Open-source Software License Exception, which permits the use of MySQL client libraries with other open source technologies under various open source licenses other than GPL.

MySQL’s flexibility and responsiveness is paying off. Granting a commercial license to MySQL is promoting and propagating the database into businesses. For instance, CORESense (http://www.coresense.com, profiled in the June 2004 issue of Linux Magazine), a provider of end-to-end retail management software to small- and medium-sized businesses, leverages its commercial licenses for MySQL to redistribute the database with its CORESense product. Although CORESense’s solution is database-independent, the privilege to redistribute MySQL significantly decreases end-user costs and delivers better performance.

Sleepycat Dual Licensing Significant to the Bottom Line

Sleepycat Software Inc. develops and sells an embedded database called Berkeley DB (BDB) that runs almost everywhere. Created in 1991 by Keith Bostic and Margo Seltzer, Berkeley DB was originally released as part of a BSD Unix distribution under a BSD license from the University of California at Berkeley.

Due to interest from commercial users willing to pay for the tool, Sleepycat was formed in 1996, and in 1997, Berkeley DB was released with a number of technical enhancements by the newly formed company. Sleepycat chose a dual licensing model. Today, dual licensing and the sale of commercial licenses account for approximately 75 percent of Sleepycat’s revenue.

Sleepycat’s commercial license is adopted by users who don’t want to make source code publicly available and wish to redistribute Berkeley DB in binary form. Otherwise, Berkeley DB can be used at no cost as long the source code can be redistributed.

Qt is the driving force of Trolltech’s revenue: developers can use it to easily create multiplatform GUI programming libraries. But Trolltech’s adoption of a dual-licensing model wasn’t as obvious or as smooth as MySQL’s or Sleepycat’s.

In 1996, Trolltech initially offered Qt with a significant restriction that disallowed free distribution of modifications. (This is similar to Sun’s efforts to allow OpenOffice to flourish as an open-source project while trying to control development.) But Qt’s adoption by the KDE development team sparked widespread use, and under pressure from a number of vocal developers, Trolltech re-released Qt under the Q Public License (QPL).

There are a number of similarities between Trolltech’s QPL and Sleepycat’s licensing of Berkeley DB. The QPL permits distribution of modifications only as separate patches. Not surprisingly, this wasn’t enough to meet the needs of all developers, so in 2000, Qt was finally released under the GNU GPL, which allows the free distribution of modifications.

Today, Qt is licensed under the GPL, QPL, and a proprietary license. Developers who create software with the GPL version must release derivative works per the terms of the GPL. Developers who want to create proprietary or closed-source solutions must first purchase a development license from Trolltech.

Is a Dual License Right for You?

If dual licensing is beneficial to vendors and end-users, why aren’t more independent software vendors (ISVs) taking advantage of it? The issue is ownership: open source companies and others can offer dual licenses because they own all of the source code. In contrast, third-party code, competitive advantage, and the potential existence of multiple copyright holders forces most ISVs into traditional software licensing.

But the fact that a project or corporation owns all of its intellectual property isn’t enough to justify the adoption and sale of a dual license. Open source projects and corporations need to develop a process that considers the viability of dual licensing. To do that, they must assess the potential user base of the solution:

* Is there a market leader with a proprietary solution that could be weakened by the disruptive nature of a dual licensed product?

* Does dual licensing offer an opportunity for market segmentation?

* If the organization or corporation owns the source code, it is possible to create new markets based on pricing elasticity and volatility of competing products.

When considering dual licensed software, look for signs of good project health, such as a vibrant community of open-source developers; developers who work full-time for the project or corporation; effective means to submit patches for the product; product stability and roadmaps; and clear licensing policies.

Dual licensing isn’t appropriate for all software vendors. It is but one means of advancing the adoption of open source software while protecting its copyright. However, dual licensing allows modification and redistribution — transforming IT from overhead to asset.

Stacey Quandt is an industry analyst and longtime Linux watcher. You can reach Stacey at squandt@squandt.com.